INHERENT LIMITATIONS (KEY: SPINE)1. Territoriality or Situs of taxation2. Public purpose of taxes3. International comity4. Non-delegability of the taxing power5. Tax Exemption of the government

(1) TESTS IN DETERMINING PUBLIC PURPOSE

a. Duty Test – whether the thing to be furthered by the appropriation of public revenue is something, which is the duty of the State, as a government, to provide.

b. Promotion of General Welfare Test – whether the proceeds of the tax will directly promote the welfare of the community in equal measure.

(2) NON-DELEGABILITY OF THE TAXING POWER

General Rule: The power of taxation is peculiarly and exclusively exercised by the legislature. (See Scope of Legislative Taxing Power, supra)- refers to tax legislationExceptions to Non-delegability:1. Flexible Tariff Clause: Authority of the President to fix tariff rates, import and

export quotas, tonnage and wharfage dues, and other duties or imposts. (Art. VI, Sec.28(2), 1987 Constitution)

2. Power of local government units to levy taxes, fees, and charges. (Art. X, Sec. 5, 1987 Constitution)

3. Delegation to administrative agencies for implementation and collection.- merely refers to tax administration or implementation

(3) SITUS OR TERRITORIALITY OF TAXATION

The power to tax is limited only to persons, property or businesses within the jurisdiction or territory of the taxing power.

FACTORS THAT DETERMINE THE SITUS:a. Kind or classification of the tax being leviedb. Situs of the thing or property taxedc. Citizenship of the taxpayerd. Residence of the taxpayere. Source of the income taxedf. Situs of the excise, privilege, business or occupation being taxed

APPLICATION OF SITUS OF TAXATION

Kind of Tax Situs

Personal or Community tax Residence or domicile of the taxpayer

Real property tax Location of property (Lex rei sitae)

Personal property tax -tangible: where it is physically located or permanently kept (Lex rei sitae)-intangible: subject to Sec. 104 of the NIRC and the principle of mobilia sequuntur personam

Business tax Place of business

Excise or Privilege tax Where the act is performed or where occupation is pursued

Sales tax Where the sale is consummated

Income Tax Consider (1) citizenship, (2) residence, and (3) source of income (Sec. 42, 1997 NIRC)

Transfer tax Residence or citizenship of the taxpayer or location of property

Franchise Tax State which granted the franchise

SITUS OF TAXATION OF INTANGIBLE PERSONAL PROPERTY

General Rule: Domicile of the owner pursuant to the principle of the mobilia sequuntur personam or movables follow the person.Exceptions:1. When the property has acquired a business situs in another jurisdiction;2. When an express provision of the statute provide for another rule.

Illustration: For purposes of estate and donor’s taxes, the following intangible properties are deemed with a situs in the Philippines:(1) franchise which must be exercised in the Philippines;(2) shares, obligations or bonds issued by any corporation organized or

constituted in the Philippines in accordance with its laws;(3) shares, obligations or bonds by any foreign corporation eighty-five percent

(85%) of the business of which is located in the Philippines;(4) shares, obligations or bonds issued by any foreign corporation if such

shares, obligations or bonds have acquired a business situs in the Philippines; and

(5) shares or rights in any partnership, business or industry established in the Philippines. (Sec. 104, 1997 NIRC).

(4) EXEMPTION OF THE GOVERNMENT

As a matter of public policy, property of the State and of its municipal subdivisions devoted to government uses and purposes is deemed to be exempt from taxation although no express provision in the law is made therefor.

General Rule: The Government is tax exempt.- However, it can also tax itself.

RULES:1. Administrative Agencies

a. Governmental function - tax exempt unless when the law expressly provides for tax. (Sec. 32 B7)

b. Proprietary function – taxable unless exempted by law. (Sec. 27C)2. GOCCs

General Rule: Income is taxable at the rate imposed upon corporations or associations engaged in a similar business, industry, or activity.Exception: GSIS, SSS, PHIC, PCSO and PAGCOR. (Sec. 27(C), NIRC)

3. Government Educational Institutions a. Property or real estate tax – property actually, directly and exclusively used

for educational purposes – exempt but income of whatever kind and character from any of their properties, real or personal, regardless of the disposition, is taxable. (Sec. 30, last par., NIRC)

b. Income received by them as such are exempt from taxes. However, their income from any of their activities conducted for profit regardless of the disposition, is taxable. (Sec. 30, last par., NIRC)

4. Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof is not included in gross income and exempt from taxation. (Sec. 32(B)(7)(b), NIRC)

5. Donations in favor of governmental institutions are considered as income on the part of the donee. However, it is not considered as taxable income because it is an exclusion from the computation of gross income. (Sec.32 (B)(3), NIRC)

6. The amount of all bequests, legacies, devises or transfers to or for the use of the Government or any political subdivision for exclusively public purposes is deductible from the gross estate. (Sec.86 (A)(3), NIRC)

7. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government are exempt from donor’s tax. (Sec. 101(A)(2), NIRC)

8. Local government units are expressly prohibited by the LGC from levying tax upon National Government, its agencies, and instrumentalities, and local government units. [Sec. 133 (o), LGC]

9. Unless otherwise provided in the Local Government Code (LGC), tax exemptions granted to all persons, whether natural or juridical, including GOCC, except local water districts, cooperatives duly registered under RA No.

6938, non-stock and non-profit institutions, are withdrawn upon effectivity of the LGC. (Sec. 193, LGC)

10.Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person shall be exempt from payment of real property tax. (Sec. 234, LGC)

(5) INTERNATIONAL COMITY

These principles limit the authority of the government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held and activities undertaken in that capacity. Even where one enters the territory of another, there is an implied understanding that the former does not thereby submit itself to the authority and jurisdiction of the other.

A. CONSTITUTIONAL LIMITATIONS

A. GENERAL OR INDIRECT CONSTITUTIONAL LIMITATIONS

1. Due Process Clause (Art. III, Sec. 1, 1987 Constitution)Requisites:a. The interests of the public as distinguished from those of a particular class

require the intervention of the State. (Substantive limitation)b. The means employed must be reasonably necessary to the accomplishment

of the purpose and not unduly oppressive. (Procedural limitation)The constitutionality of a legislative taxing act questioned on the ground of

denial of due process requires the existence of an actual case or controversy.

2. Equal Protection Clause (Art. III, Sec. 1, 1987 ConstitutionRequisites of a Valid Classification:

a. based upon substantial distinctionsb. germane to the purposes of the lawc. not limited to existing conditions onlyd. apply equally to all members of the class

3. Freedom Of Speech And Of The Press (Art. III, Sec. 4, 1987 Constitution)There is curtailment of press freedom and freedom of thought and

expression if a tax is levied in order to suppress this basic right and impose a prior restraint. (Tolentino vs. Secretary of Finance, GR No. 115455, August 25, 1994)

4. Non-Infringement Of Religious Freedom And Worship (Art. III, Sec. 5, 1987 Constitution)

A license tax or fee constitutes a curtailment of religious freedom if imposed as a condition for its exercise. (American Bible Society vs. City of Manila, GR No. L-9637, April 30, 1957)

5. Non-Impairment Of Contracts (Art. III, Sec. 10, 1987 Constitution)No law impairing the obligation of contract shall be passed. (Sec. 10, Art.

III, 1987 Constitution)The rule, however, does not apply to public utility franchises or right since

they are subject to amendment, alteration or repeal by the Congress when the public interest so requires. (Cagayan Electric & Light Co., Inc. v. Commissioner, GR No. 60216, September 25, 1985)

RULES:a. When the exemption is bilaterally agreed upon between the government and

the taxpayer – it cannot be withdrawn without violating the non-impairment clause.

b. When it is unilaterally granted by law, and the same is withdrawn by virtue of another law – no violation.

c. When the exemption is granted under a franchise – it may be withdrawn at any time thus, not a violation of the non-impairment of contracts

6. Presidential power to grant reprieves, commutations and pardons and remit fines and forfeitures after conviction (ART. VII, SEC. 19, 1987 CONSTITUTION)

Due Process Equal Protection UniformityTaxpayer may not be deprived of life, liberty or property

Taxpayers shall be treated alike under like circumstances and conditions both in the

Taxable articles, or kinds of property of the same class, shall be taxed at the

without due process of law. Notice must, therefore, be given in case of failure to pay taxes

privileges conferred and liabilities imposed.

same rate. There should therefore, be no direct double taxation

B. SPECIFIC OR DIRECT CONSTITUTIONAL LIMITATIONS

1. Non-Imprisonment For Debt Or Non-Payment Of Poll Tax (Art. III, Sec. 20, 1987 Constitution)

2. Rule Requiring That Appropriations, Revenue And Tariff Bills Shall Originate Exclusively From The House Of Representatives (Art. VI, Sec. 24, 1987 Constitution)

3. Uniformity, Equitability And Progressivity Of Taxation (Art. VI, Sec. 28(1), 1987 Constitution)Uniformity – all taxable articles or kinds of property of the same class are taxed at the same rate.Equitability – the burden falls to those who are more capable to pay.Progressivity – rate increases as the tax base increases.

Q: Is a tax law adopting a regressive system of taxation valid?A: Yes. The Constitution does not really prohibit the imposition of indirect

taxes which, like the VAT, are regressive. The Constitutional provision means simply that indirect taxes shall be minimized. The mandate to Congress is not to prescribe, but to evolve, a progressive tax system. (EVAT En Banc Resolution, Tolentino, et al vs Secretary of Finance, October 30, 1995)

4. Limitations On The Congressional Power To Delegate To The President The Authority To Fix Tariff Rates, Import And Export Quotas, Etc. (Art. VI, Sec. 28(2), 1987 Constitution)

5. Tax Exemption Of Properties Actually, Directly And Exclusively Used For Religious, Charitable And Educational Purposes. (Art. VI, Sec. 28(3) 7, 1987 Constitution)

The constitutional provision (above cited) which grants tax exemption applies only to property or realty taxes assessed on such properties used actually, directly exclusively for religious, charitable and educational purposes. (Lladoc vs. Commissioner, GR No. L-19201, June 16, 1965)

The present Constitution required that for the exemption of “lands, buildings and improvements”, they should not only be “exclusively” but also “actually” and “directly” used for religious and charitable purposes. (Province of Abra vs. Hernando, GR No. L-49336, August 31, 1981)

The test of exemption from taxation is the use of the property for the purposes mentioned in the Constitution. (Abra Valley College Inc. vs. Aquino, GR No. L-39086, June 15, 1988)

EXCLUSIVE BUT NOT ABSOLUTE USEThe term “ exclusively used” does not necessarily mean total or absolute use

for religious, charitable and educational purposes. If the property is incidentally used for said purposes, the tax exemption may still subsist. (Abra Valley College Inc. vs. Aquino, Gr No. L-39086, June 15, 1988)

Corollarily, if a property, although actually owned by a religious, charitable and educational institution is used for a non- exempt purpose, the exemption from tax shall not attach

ART. XIV, SEC 4(3) ART. VI, SEC 28(3)Grantee Non- stock, non profit

educational institutionReligious, educational, charitable institutions

Taxes covered Income taxCustom DutiesProperty tax (DECS Order No. 137-187)

Property tax

6. Voting Requirement In Connection With The Legislative Grant Of Tax Exemption (Art. VI, Sec. 28(4), 1987 Constitution)

7. Non-Impairment Of The Jurisdiction Of The Supreme Court In Tax Cases (Art. VIII, Sec. 2 And 5(2)(B), 1987 Constitution)

8. Exemption From Taxes Of The Revenues And Assets Of Educational Institutions, Including Grants, Endowments, Donations And Contributions. (Art. XIV, Sec. 4(3) And (4), 1987 Constitution)

OTHER SPECIFIC TAX PROVISIONS IN THE CONSTITUTION 1. Power of the President to veto any particular item or items in an

appropriation, revenue, or tariff bill. (Art VI, Sec. 27(2), 1987 Constitution) 2. Necessity of an appropriation before money may be paid out of the public

treasury. (Art. VI, Sec. 29 (1), 1987 Constitution)3. Non-appropriation of public money or property for the use, benefit, or support

of any sect, church, or system of religion. (Art. VI, Sec. 29 (2), 1987 Constitution)

4. Treatment of taxes levied for a special purpose. (Art. VI, Sec. 29 (3), 1987 Constitution)

5. Internal revenue allotments to local government units. (Art. X, Sec. 6, 1987 Constitution.